Hopes of a December rate cut sink

Hopes of a pre-Christmas rate cut may have been dashed after the Reserve Bank revised up its inflation forecasts.

The RBA on Friday said it expected the consumer price index (CPI, a measure of inflation) to peak at 3.25 per cent in 2012/13, while underlying inflation is expected to reach 2.75 per cent.

The central bank has a target for annual inflation of two to three per cent and adjusts the cash rate to keep price rises within that range on average over time.

Up until the release of its quarterly statement on Monetary Policy on Friday, the RBA had forecast CPI inflation of between 2.5 and 3.5 per cent and underlying inflation in the two to three per cent range by mid-2013.

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But a higher-than-expected rise in the CPI in the September quarter prompted the central bank to lift its forecasts into the top halves of those ranges.

HSBC chief economist Paul Bloxham said the higher inflation rate gave the RBA less room to cut the cash rate.

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He said Australians had been shielded from higher price rises due to increases in the value of the Australian dollar but that effect was waning.

‘‘With the impact of the high exchange rate starting to wear off on inflation, that might leave them less room to move on rates,’’ Mr Bloxham said.

CommSec chief economist Craig James said the tone of the RBA’s statement suggested the RBA would not cut the cash rate in December.

‘‘Certainly a rate cut in December can be ruled out unless there is a disaster in Europe,’’ he said.

In the statement, the RBA said global economic data appeared to have been more positive recently and it appeared recent interest rate cuts were having a positive effect on the domestic economy.

The RBA has cut the cash rate 1.5 percentage points since November 2011.

‘‘The Reserve Bank believes it has done enough for now,’’ Mr James said.

But JPMorgan Australia chief economist Stephen Walters believed the persistently high value of the Australian dollar, currently trading around 104 US cents, and falling commodity prices meant further rate cuts were likely.

‘‘The Australian dollar... remains uncomfortably high, particularly relative to lower bulk commodity prices, and the leading indicators of employment have sagged,’’ he said.

The RBA also expects recent falls in commodity prices and reduced investment in mining to slow Australia’s rate of economic growth in 2013.

It is now forecasting GDP growth of three per cent in 2013, down from its forecast of 3.75 per cent growth in 2012.

Previously, it had forecast of growth of between 2.75 and 3.25 per cent for 2013.

‘‘The downward revision to mining investment reflects the effect of the recent decline in bulk commodity prices on mining companies’ cash flows and their plans for spending,’’ the RBA said.

Meanwhile, the RBA said the federal government’s efforts to return the national budget to surplus in 2012-13 could detract between 0.75 and 1.5 percentage points from GDP growth in the current financial year.

‘‘The Australian government’s fiscal consolidation appears to be weighing on growth over the second half of the year,’’ it said.

The RBA also said it expected employment growth to remain subdued, with the national unemployment rate expected to rise a little above its current level of 5.4 per cent.